Interaction of roles and modes of accounting
| Financial reporting | Statistical accounting | Budgeting | Fiscal sustainability projections | |
|---|---|---|---|---|
| Territorialization | Accruals accounting emphasizes the reporting entity. Consolidation techniques based upon concepts of control have provided a broader coverage than the emphasis on general government expenditure in statistical accounting. Exclusion of liabilities arising from pensions, guarantees and public-private partnerships leave scope for under-reporting | Statistical accounting puts the emphasis on general government, creating the vulnerability to arbitrage which puts assets and particularly liabilities outside its scope. This is narrower coverage than government financial reporting and therefore more vulnerable | Budgeting is where governments have most scope to decide what is within budget, and this is heavily influenced by constitutional provisions and inherited practice. Since 2002–03, UK governments have budgeted on an accruals basis, though following statistical accounting on coverage. What is inside and outside can be controversial as well as technical | Fiscal sustainability projections provide the widest territorialization as they recognize long-term factors such as demography. Fiscal sustainability can only be judged over the long term, so that five-year medium-term economic forecasts extended with 45-year cash projections are constructed on the basis of current policies. The future is territorialized |
| Mediation | Entity-level reporting has a clear role in supporting accountability for the use of public resources, although this may be compromised by boundary changes and the obligations of non-public bodies in the provision of public services. Central government’s use of collibration powers on lower layers of public bodies may directly affect the reporting of results by those bodies. Mediation at the whole-of-government level has proved more difficult to establish in view of a limited user audience. The reasons for this include long delays in publication and technical complexity | Statistical accounting derives its central role in mediation from the combination of international comparability and the speed with which provisional data can be published. Governments (via the Treasury) are likely to have regard to the comparative performance of major economies and expectations of international capital markets | Budgeting is what politicians and the media care most about, focusing on the year ahead or a small number of years ahead. This is where decisions about the size of the public sector and priorities given to different spending areas are determined. Central government may have extensive powers of collibration that impact upon the relative powers of local authorities and other public sector entities. Budget statements of the Chancellor of the Exchequer are political and theatrical, as well as economic, events | Long-term fiscal projections are sensitive to what are assumed to be current policies, even when it is obvious that future fiscal constraints will compel policy change. These projections have low mediating impact as they rarely enter public debate and remain the domain of specialists. One reason for this is that they paint a pessimistic view of the future, bringing in expenditure on state pensions, which is outside the scope of the other three modes of government accounting, either for reasons of coverage or time horizon |
| Adjudication | The UK follows IFRS as interpreted and modified for government by the Treasury with the approval of the Financial Reporting Advisory Board. Adjudication of compliance is the responsibility of the NAO which reports to the Public Accounts Committee of the House of Commons. Although theory refers to citizens as users of these statements, performance adjudication is often limited to a few specialized intermediaries. Recent excessive delays in the publication of these statements have reduced their performance-adjudicating potential | The UK follows ESA10, which was an international obligation prior to Brexit. In future it might follow the UN System of National Accounts of which ESA10 is a derivation. Eurostat monitors compliance by EU member states but now has no role in relation to the UK, except in regard to the UK’s remaining financial obligations to the EU. International organizations such as the IMF (Article 4 consultations) and OECD (country reviews) are influential. Fiscal statistics are produced very rapidly and receive close attention from debt and currency markets | The Treasury has a lot of discretion, although there is monitoring by international organizations such as the IMF and the OECD. The OBR gives the Treasury some adjudicative protection against ministerial fantasies and pressures to fudge forecasts in its reviews of the expected impact of budget statements. The events of September 2022 illustrate that the OBR’s adjudicative role could be side-stepped by a government. The Institute for Fiscal Studies is an influential commentator providing independent performance adjudication | The OBR took over responsibility from the Treasury for long-term fiscal projections which started in the early 2000s. Repeatedly, the OBR shows that current policies would lead to spiralling public debt, but these receive little public attention. Performance adjudication is limited to specialized commentators, such as the Institute for Fiscal Studies and some academic commentators, and the international debt and currency markets |
| Subjectivization | Government action is constrained by following external accounting standards when compliance is credibly monitored. Under fiscal pressure, governments may seek to subvert their own rules, for example by recourse to borrowing and liabilities which are not reported. Public entities lower down the hierarchy will point to irrational constraints as justification for trying to evade them | Governments are constrained by their need to access debt markets and to protect their currency. The UK Government uses its executive dominance over Parliament (at least when it has a working majority of seats in the House of Commons) to pass the necessary legislation. Limited subjectivization may come from independent regulators such as the Bank of England and the OBR | Budgeting involves subjectivization at all levels. Governments are constrained by macro-fiscal realities because of the importance of debt and currency markets. Being dependent on public money from the budget exposes public organizations to instabilities they would not face if they were private organizations. In some circumstances, there may be resistance to constraints | Fiscal sustainability projections extend the usual shortish time horizon to 50 years or more, which is far beyond the time horizon of electoral politics. UK demography is known to be adverse in fiscal terms. There is so much uncertainty about the future that resistance may come in the form of ignoring warning signs, with the result that future adjustments will be more brutal than might otherwise have been necessary |
| Financial reporting | Statistical accounting | Budgeting | Fiscal sustainability projections | |
|---|---|---|---|---|
| Territorialization | Accruals accounting emphasizes the reporting entity. Consolidation techniques based upon concepts of control have provided a broader coverage than the emphasis on general government expenditure in statistical accounting. Exclusion of liabilities arising from pensions, guarantees and public-private partnerships leave scope for under-reporting | Statistical accounting puts the emphasis on general government, creating the vulnerability to arbitrage which puts assets and particularly liabilities outside its scope. This is narrower coverage than government financial reporting and therefore more vulnerable | Budgeting is where governments have most scope to decide what is within budget, and this is heavily influenced by constitutional provisions and inherited practice. Since 2002–03, UK governments have budgeted on an accruals basis, though following statistical accounting on coverage. What is inside and outside can be controversial as well as technical | Fiscal sustainability projections provide the widest territorialization as they recognize long-term factors such as demography. Fiscal sustainability can only be judged over the long term, so that five-year medium-term economic forecasts extended with 45-year cash projections are constructed on the basis of current policies. The future is territorialized |
| Mediation | Entity-level reporting has a clear role in supporting accountability for the use of public resources, although this may be compromised by boundary changes and the obligations of non-public bodies in the provision of public services. Central government’s use of collibration powers on lower layers of public bodies may directly affect the reporting of results by those bodies. Mediation at the whole-of-government level has proved more difficult to establish in view of a limited user audience. The reasons for this include long delays in publication and technical complexity | Statistical accounting derives its central role in mediation from the combination of international comparability and the speed with which provisional data can be published. Governments (via the Treasury) are likely to have regard to the comparative performance of major economies and expectations of international capital markets | Budgeting is what politicians and the media care most about, focusing on the year ahead or a small number of years ahead. This is where decisions about the size of the public sector and priorities given to different spending areas are determined. Central government may have extensive powers of collibration that impact upon the relative powers of local authorities and other public sector entities. Budget statements of the Chancellor of the Exchequer are political and theatrical, as well as economic, events | Long-term fiscal projections are sensitive to what are assumed to be current policies, even when it is obvious that future fiscal constraints will compel policy change. These projections have low mediating impact as they rarely enter public debate and remain the domain of specialists. One reason for this is that they paint a pessimistic view of the future, bringing in expenditure on state pensions, which is outside the scope of the other three modes of government accounting, either for reasons of coverage or time horizon |
| Adjudication | The UK follows IFRS as interpreted and modified for government by the Treasury with the approval of the Financial Reporting Advisory Board. Adjudication of compliance is the responsibility of the NAO which reports to the Public Accounts Committee of the House of Commons. Although theory refers to citizens as users of these statements, performance adjudication is often limited to a few specialized intermediaries. Recent excessive delays in the publication of these statements have reduced their performance-adjudicating potential | The UK follows ESA10, which was an international obligation prior to Brexit. In future it might follow the UN System of National Accounts of which ESA10 is a derivation. Eurostat monitors compliance by EU member states but now has no role in relation to the UK, except in regard to the UK’s remaining financial obligations to the EU. International organizations such as the IMF (Article 4 consultations) and OECD (country reviews) are influential. Fiscal statistics are produced very rapidly and receive close attention from debt and currency markets | The Treasury has a lot of discretion, although there is monitoring by international organizations such as the IMF and the OECD. The OBR gives the Treasury some adjudicative protection against ministerial fantasies and pressures to fudge forecasts in its reviews of the expected impact of budget statements. The events of September 2022 illustrate that the OBR’s adjudicative role could be side-stepped by a government. The Institute for Fiscal Studies is an influential commentator providing independent performance adjudication | The OBR took over responsibility from the Treasury for long-term fiscal projections which started in the early 2000s. Repeatedly, the OBR shows that current policies would lead to spiralling public debt, but these receive little public attention. Performance adjudication is limited to specialized commentators, such as the Institute for Fiscal Studies and some academic commentators, and the international debt and currency markets |
| Subjectivization | Government action is constrained by following external accounting standards when compliance is credibly monitored. Under fiscal pressure, governments may seek to subvert their own rules, for example by recourse to borrowing and liabilities which are not reported. Public entities lower down the hierarchy will point to irrational constraints as justification for trying to evade them | Governments are constrained by their need to access debt markets and to protect their currency. The UK Government uses its executive dominance over Parliament (at least when it has a working majority of seats in the House of Commons) to pass the necessary legislation. Limited subjectivization may come from independent regulators such as the Bank of England and the OBR | Budgeting involves subjectivization at all levels. Governments are constrained by macro-fiscal realities because of the importance of debt and currency markets. Being dependent on public money from the budget exposes public organizations to instabilities they would not face if they were private organizations. In some circumstances, there may be resistance to constraints | Fiscal sustainability projections extend the usual shortish time horizon to 50 years or more, which is far beyond the time horizon of electoral politics. UK demography is known to be adverse in fiscal terms. There is so much uncertainty about the future that resistance may come in the form of ignoring warning signs, with the result that future adjustments will be more brutal than might otherwise have been necessary |
Source(s): Prepared by authors
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